5 steps for creating a budget for your business

When you think about the most exciting parts of owning a company, creating a business budget might not be at the top of your list. But having a detailed financial plan in place is key to setting yourself up for long-term success. You can create a business budget by projecting your company’s revenue and expenses over a set period of time. This gives you the opportunity to set expectations and provides a future point of reference to help you stay on track.

Keep reading to learn how creating a business budget can help you make smarter decisions for your business.

What you’ll learn:

• A business budget is a detailed way to estimate your company’s future revenue and expenses, so you can determine if you’re on track to meet your financial goals. 

• The main types of business budgeting techniques include incremental, activity-based, value proposition and zero-based.

• To create a business budget, identify your business’s anticipated expenses and subtract them from your projected income to determine if you’re operating at a profit or loss.

In general, there are four main types of business budgeting methods, each with its own pros and cons to consider.

• Incremental budgeting: This type of budgeting technique works by making small changes to a previous year’s budget instead of creating a new one. Using an existing budget gives your company a foundation to build on while making adjustments for the upcoming period. This is a straightforward budgeting method, especially if the main cost drivers—like number of hours worked and the number of existing customers—don’t change.

• Activity-based budgeting (ABB): ABB focuses on analyzing business activities to build a budget and determine how costs should be allocated. It breaks down expenses based on the activities required to produce the business’s products or services (think R&D, manufacturing, marketing, etc.). This differs from traditional budgeting methods, which rely on historical data to guide budgeting decisions. This approach gives a clearer view of your business’s cash flow and can help identify areas where you can reduce costs.

• Value proposition budgeting: This method focuses on how items in the budget provide value for your business. To create this type of budget, you must consider why an item is included, whether it provides value to customers, staff or stakeholders, and if the cost can be justified. The goal of value proposition budgeting is to prioritize spending on items that drive the most value, helping reduce unnecessary costs. 

• Zero-based budgeting: Zero-based budgeting is a popular technique that focuses on starting your business’s budget at zero and building it from the bottom up. This means all expenses must be accounted for and should only be approved if they’re essential to the business. This can be a more time-consuming way to budget, but companies focused on cost-cutting—like in the case of financial restructuring—may choose this method.

There are some general steps you can follow when creating a business budget, but the specifics may vary depending on your company and the budgeting method you choose.

Start by assessing your business’s current financial data to determine your company’s profitability. You may also take a closer look at historical trends and seasonality shifts to get the full picture of your company’s financial standing.

To figure out your business’s income, consider all sources of revenue from the past year. In addition to regular sales, include other income streams like investment returns or the sale of assets. For this step, use your business’s gross revenue, which is the total amount the company earns before accounting for expenses. You can typically find this figure on the top line of your company’s income statement.

Once you’ve estimated your business income for the set budgeting period, the next step is to estimate your expenses. Businesses typically have different types of expenses, so you can start by separating them into three categories: fixed costs, variable expenses and one-time expenses.

• Fixed costs: These are expenses that don’t fluctuate over time, making them easier to anticipate when creating a business budget. Examples of fixed costs include rent, insurance and loan or debt payments. 

• Variable expenses: These are expenses that can change depending on your business’s production level. Variable costs are unpredictable and include items like raw materials, sales commissions and distribution costs. 

• One-time expenses: Also called one-time spends, these are nonrecurring costs that a business rarely incurs. A one-time expense could include costs associated with developing a new product or purchasing equipment.

You can then subtract your total expenses from your total revenue to determine if your business is profitable or losing money. If you have income remaining after subtracting expenses from revenue, you have a budget surplus. If expenses surpass income, you have a budget deficit.

Once you know whether your business has a budget surplus or deficit, you can make more informed decisions. For example, if your business has a surplus, you might choose to invest more money into growing your business. But if your business has a deficit, you could pivot your plans by cutting expenses or implementing a more aggressive pricing strategy.

When creating a business budget, here are some mistakes to avoid:

• Setting overly optimistic goals: While it’s tempting to aim high when making projections, it’s important to set business goals that are attainable and aligned with expectations. You can refer to historical performance data and typical industry standards to provide a realistic benchmark when forecasting.

• Having incorrect financial estimations: When projecting your business’s expenses, it’s crucial to have accurate figures. Underestimating or overestimating costs can lead to errors or discrepancies in your business’s budget. To ensure your expense estimates are correct, gather detailed information from your company’s previous expenses—like accounting records or financial statements—and review this data with a fine-tooth comb.

• Not accounting for unanticipated expenses: Business can be unpredictable, and unexpected expenses can cripple productivity and efficiency. That’s why it’s important to have some cushion in your budget to account for unforeseen expenses. 

• Failing to reevaluate your budget: Once you’ve created your budget, it might be tempting to only revisit it at year’s end. But this can cause misalignment with your company’s goals and objectives as market conditions change or new financial demands arise throughout the year. Your business’s budget should be reviewed and adjusted regularly to promote long-term success.

Having a business budget is important because it can help inform certain decisions and provide relevant information, such as:

• Determining how to best allocate resources: Once you’ve forecasted income and expenses, you can figure out the most effective ways to distribute available funds or conserve resources.

• Understanding how much money is required to hit certain goals: Your business budget can help set expectations and determine how much revenue your company needs to make to reach its goals.

• Opening up financing opportunities: Having a business budget in place can give you a better idea of if—and when—you need to access more cash. And depending on the type of financing you’re trying to secure, lenders or investors may request to review your budget as part of the approval process.

• Figuring out which initiatives to prioritize: Setting a budget helps you understand which projects make the most sense to tackle first based on their potential return on investment.

Having a budget in place is essential to ensure you have enough resources to cover expenses and support the initiatives needed to grow your business. There are tools you can use to budget more accurately and efficiently, like templates or bookkeeping software. And Capital One business credit cards offer features like purchase records and year-end summaries to streamline expense tracking. Get pre-approved today—with no harm to your credit.